India's corporate sector is increasingly looking globally for expansion and technology acquisition, yet the tax framework hasn't quite caught up to support these ambitions. As Budget 2026 approaches, experts are pointing out the need for updates to tax regulations to encourage outbound mergers and acquisitions (M&A).
Current Challenges in Outbound M&A Taxation
Several factors contribute to the need for a revised tax framework. The existing regulations place practical constraints on outbound investments, limiting the amount to the lower of $1 billion or 400% of the entity's net worth. This can restrict Indian companies aiming to acquire sizable assets abroad. Moreover, there are concerns about round tripping and prolonged approval processes, especially for investments involving countries sharing a land border with India. This often limits the creation of efficient joint venture structures.
Another area needing attention is the tax treatment of asset-light acquisitions, where value is driven by strategic teams, know-how, or other intangibles. Uncertainty exists regarding the manner and permissibility of amortization rules, and clearer guidance would foster more predictable outcomes for strategic tech transactions.
Budget 2026 Expectations
The upcoming budget presents an opportunity to introduce reforms that align with India's ambitions of becoming a 'Viksit Bharat' by 2047. Some key expectations include:
- Clearer Tax Deductions: Providing clearer guidelines on tax deductions, especially concerning interest, is crucial.
- Tax Neutrality: Ensuring tax neutrality for overseas mergers, similar to domestic mergers, would streamline restructuring and reduce compliance burdens. Currently, domestic corporate mergers and demergers have been granted complete tax neutrality, while foreign corporate reorganizations may result in taxation regardless of transaction value. The Income Tax Act, 1961, generally provides tax-neutral treatment for mergers or amalgamations of Indian companies, extending this exemption to shareholders receiving shares in the amalgamated company. However, a similar provision doesn't exist for shareholders of foreign companies holding Indian assets during mergers. Budget 2026 could simplify income tax rules for global mergers involving Indian firms.
- Expanded DTAA Networks: Expanding Double Taxation Avoidance Agreement (DTAA) networks can further facilitate cross-border transactions. Payments made across borders are often subject to withholding taxes, and applicable rates depend on the DTAAs between India and the other country involved.
- Patent Box Regime Review: India's current patent box regime offers a concessional tax rate on royalties from patents developed and registered domestically. However, its scope is narrow and excludes many forms of modern technology-driven IP, limiting its usefulness.
Broader Implications
The need for tax reforms extends beyond just facilitating outbound M&A. It's about fostering an environment where Indian companies can compete globally, attract foreign investment, and contribute to the country's economic growth. Strategic tech deals often involve IP-rich assets and non-standard structures that pose challenges under current rules. Evolving the domestic tax and regulatory frameworks will support deal certainty and encourage strategic collaborations.
Other Considerations
In addition to the above, the Budget 2026 could also consider:
- Modernizing the LLP framework: Giving LLP mergers the same tax-neutral status as company mergers.
- Rationalizing holding periods: Lowering the holding period threshold for slump sale transactions to align with other asset transfers.
By addressing these issues in Budget 2026, India can create a more supportive ecosystem for outbound M&A, encouraging its companies to expand globally and bring valuable expertise and technology back home.
